The future of the mining sector in Australia is uncertain, with a
slowing China continuing to affect commodity prices along with an increasing
drive towards renewables. While the future of the coal industry is likely to
benefit from increasing demand in south-east Asia in coming years, an
oversupply of key resources continues to influence both coal and iron ore
prices. In order for Australia to thrive over the next few decades, the mining
industry will need to co-exist with the agriculture, tourism, and renewable
energy sectors.
ANZ recently downgraded its iron ore and coal prices for the next two years, with forecasts dropping by 5 percent to 13 percent for 2016 and 2017. Reduced growth in China was the major factor leading to revisions, with the previous steel consumption peak moved from 2020 to 2014 due to a drop in the global steel demand outlook. Coal and iron ore prices are heavily dependent on one another, with coking coal used in steel production. According to ANZ analysts, "While we still see steel demand recovering mildly in the later part of the decade, in-line with a less sluggish housing market, we now forecast that peak steel consumption occurred in 2014 from a previous forecast of 2020."
The big global banks are also concerned about a downturn in energy resources and other commodities, with Morgan Stanley, Goldman Sachs, and Citigroup all predicting a bearish future. According to Ed Morse, the global head of Citigroup’s commodities research division, “Across energy, industrial metals, and agricultural products markets remain oversupplied, partially because of the sluggish world economy." According to JP Morgan, however, the bottom is already here for the mining industry, with “some additional EPS cuts for miners near term, but again, not a steep change”.
The renewable energy sector will also affect commodity prices as it explodes over the next decade, with the U.S, China, and India all announcing major steps to fight climate change over recent weeks. China will launch an emissions trading scheme by 2017, with India setting an ambitious target for up to 40 percent renewable power and 35 percent emissions cuts by 2030. India is the last major economy to submit a climate change plan to the UN before the coming global warming talks in December, with every major emitter except Iran and Saudi Arabia now on-board.
Despite a rise in renewables, an oversupply of resources, and weaker demand in China, the coal industry has had some good news. According to a new report by the International Energy Agency, demand for thermal coal is set to triple in south-east Asia over the next 25 years. With demand for coal expected to exceed the capacity of Indonesia and other domestic suppliers, Australian coal exporters are likely to benefit. ; According to Tim Buckley from the Institute for Energy Economics and Financial Analysis, however, a significant surge in demand may only lead to "profitless prosperity" due to decade-low coal prices.
In order for Australia to thrive in this brave new world, the economy will have to diversify beyond its current dependence on coal and iron ore. While some people are predicting the demise of mining in Australia, newly appointed resources and energy minister Josh Frydenberg thinks Australia can have its cake and eat it too: “I’m very positive about the renewable energy space; I’m very positive about the opportunities for further investment. I’m very positive about the increasing demand for Australia’s natural resources and energy sector.”
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